MRGE

Merge Healthcare Incorporated. (MRGE)

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Merge Healthcare Incorporated (MRGE)

Q2 2013 Earnings Call

August 09, 2013 8:30 am ET

Executives

Justin C. Dearborn - Director, Chief Executive Officer of Merge DNA and President of Merge Healthcare

Steven M. Oreskovich - Chief Financial Officer, Chief Accounting Officer and Treasurer

Presentation

Operator

Good morning, and welcome to Merge Second Quarter 2013 Earnings Call.

Today's call is being hosted by Justin Dearborn, Chief Executive Officer; and Steve Oreskovich, Merge's Chief Financial Officer.

Before we get started, please consider that the comments today may contain forward-looking statements under the Private Securities Litigation Reform Act of 1995 and not historical facts. Actual results may differ. Various critical factors that could affect future results are set forth in the company's recent SEC filings and press releases. The company undertakes no obligation to update or revise any forward-looking statements.

In addition, there may be references to non-GAAP financial measures. These measures are supplemental to the GAAP financial measures and should not be viewed as an alternative to them. For greater information regarding these metrics, please see the related discussion in the company's earnings release.

With that, I will turn the call over to Merge's CEO, Justin Dearborn.

Justin C. Dearborn

Thank you, operator, and thank you to everyone for joining us this morning. First, let me say that the entire board of Merge is extremely disappointed with the company's results. On behalf of the board, and especially its Chairman and our largest shareholder, we apologize for these results. They are unacceptable and we are working day and night to turn this situation around.

Following the acquisition of AMICAS in April of 2010, our plan was to grow our sales and marketing teams and focus on large enterprise sales or system-wide deals with longer sales cycles and lumpier but large upfront revenue. While we have had some success in the past and expect even more in the future, the market did not develop as fast as we had anticipated and no longer justifies the cost structure that we built. We believe that the large, attractive opportunities still exist in the market, but we need to scale our cost to match their timing. We will continue to focus on per-study pricing arrangements that provide for better predictability and we will deliver additional solutions in hosted environments, creating a healthier business model for Merge and our customers.

As you read this morning, after a thorough analysis, the board accepted Jeff's resignation, even though we know that issues facing the company go well beyond any single individual, even the CEO. We also evaluated where the company stands today, and looking past the current situation, I and the board remain bullish on the company, its products and its people. We are in a center of a growing dynamic industry and are well positioned as a leader in health care imaging technology with a great customer base. Our clinical trials business is growing rapidly, as evidenced by the backlog growth of almost $30 million since our new platform launched 1 short year ago. This group is also an example of how a difficult decision a few years ago is paying off with an industry-changing revenue and product delivery model. We have the ability to continue to innovate and develop new products and reach new markets. We have scaled back the size of our sales and marketing team, reducing our cost by several million dollars a year while still addressing our market opportunities. We successfully refinanced the company's high-yield debt, dramatically lowering our annual cash interest cost. I am fortunate to have the support of the management team as well as our board. Nancy Koenig, who is promoted Chief Operating Officer and elected to the Board of Directors, knows the industry, the company and its products and can help drive the company forward on a more streamlined basis. Michael Ferro, Nancy and I worked together for 15 years in 2 different public companies. We successfully resurrected Merge 5 years ago when it had a few million dollars in the bank, rapidly declining revenues and was on the verge of bankruptcy. We, along with the existing management team, can once again grow Merge, albeit, we are starting from a much, much better position. Additionally, Steve Tolle, a 25-year industry veteran, has been promoted as Chief Product Officer. Over the past year, under Steve's leadership, we have taken important steps forward in aligning our entire solution portfolio and bringing several critical innovations to market. Steve will continue to guide our corporate-wide product strategy and will take on additional responsibility for our marketing and overall strategy for our health care offerings.

Now we'd like to address the trends we saw in Q2 that prompted the reevaluation of our organization and cost structures. Q2 was a challenging quarter not only for Merge, but for many other non-electronic medical record vendors and health care IT. First, across-the-board, and especially among larger hospitals and health systems, we saw temporary spending slowdowns. At the end of Q1, Reuters reported that hospital change was reporting a meager first quarter earnings due in part to low patient volume and a weak U.S. economy operating in less than full employment. This had a ripple effect into Q2, as lagging patient volumes hurt hospital earnings, and many of our largest clients and prospects deferred decision-making processes. This trend was also highlighted in the Wall Street Journal last week with respect to pending -- to the pending acquisition of Health Management Associates by Community Health Systems. When hospital spending pauses, it has an immediate impact on us. Second, the March 1 budget sequester introduced uneasiness, as $11 billion in Medicare cuts or 2% of Medicare provider payments were applied across all of health care starting April 1. This, combined with ongoing uncertainty around the future of health care reform, has had a chilling effect in decision-making amongst our largest clients and prospects. Last, we saw many organizations very focused on and, frankly, distracted by the upcoming transition from ICD-9 to ICD-10. As late as this summer, many believe that the deadlines for converting to ICD-10 would be extended once again. However, as to the June 17 announcement that the deadline for conversion will remain October 1, 2014. Health care organizations are scrambling to ensure readiness for this very substantial transition. This has forced clients and prospects to stall decision and projects not directly related to their transition to ICD-10. Given the trends, which we believe are temporary, we have acted. Our comprehensive program is designed to ensure that Merge is lean, operationally optimized to capitalize on our highest growth areas and strategically positioned for long-term success. We expect these actions will result in a reduction of annualized operating expenditures of approximately $6 million. The vast majority of these reductions came from the sales and sales operation areas. Obviously, while our Q2 results necessitate a leaner organization, aligning our business with future growth opportunities is equally important. We are focused on the markets that represent the most attractive business opportunities, and we are confident that our value proposition remains very strong.

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